The Alaska Senate completed action Tuesday on its bill to reform state taxes on oil and natural gas, picking up two more affirmative votes on reconsideration for a 16-4 endorsement of a 22.5% net production tax on oil and 7.5%, or one-third of that, for natural gas. The bill has gone to the Finance Committee in the Alaska House and is expected to make it to the House floor by Monday.

The final Senate vote came despite a protest by Gov. Frank Murkowski, who held a press conference early Tuesday to push for a return to his own 20-20 plan, which includes a 20% net production tax and a 20% credit for capital investments (see Daily GPI, April 26). The Senate bill offsets its higher 22.5% tax with a 25% investment credit. The first vote on Monday had been 16-6 with the Republican majority all voting for it, along with some Democrats.

The Alaska Senate Finance Committee last weekend had added the provision reducing the natural gas tax to one-third of the oil rate as an incentive for gas development; Murkowski made no objection to that change.

Murkowski had warned that the higher oil tax could jeopardize the pact he has negotiated with producers for the $25 billion Alaska natural gas pipeline. The terms of the final tax measure will be incorporated into the pipeline pact, guaranteeing a stable tax environment for the project for 30 years. Besides severance taxes, the oil industry in Alaska also pays royalties, property taxes and corporate income taxes to the state.

Recovery of 35 Tcf of North Slope gas reserves hinges on construction of the pipeline, which in turn depends on tax terms agreeable to all. The governor has set a May 10 special session of the legislature for the unveiling of the pipeline contract, which he was authorized by the legislature to negotiate with BP, ConocoPhillips and ExxonMobil under the Alaska Stranded Gas Development Act.

Meanwhile the governor, recently returned from a marketing and trade trip to Europe, said Royal Dutch Shell was interested in marketing the state's share of North Slope gas, which would include both royalty gas and gas taken in-kind as a substitute for taxes. While selecting marketers for the Alaska's gas will be competitive, Murkowski said discussions with the oil major indicated "the state will have an opportunity to market its gas without any difficulty."

Shell had indicated it would be submitting a proposal to market Alaska's gas in the near future, according to an announcement Murkowski issued following his meeting April 11 with Malcolm Brinded, executive director of Exploration & Production for Royal Dutch Shell.

"One of the key features of the gas pipeline contract is that the state will take its gas in-kind," but "some have expressed concern about the state's capacity to market that gas. It is of tremendous value to have a worldwide industry leader and expert in gas marketing and transportation such as Shell express interest in marketing the state's gas," Murkowski said.

He also referred at the briefing to discussions with Shell about the possibility of a syngas project to be constructed on the Alaska Peninsula across the inlet from the nitrogen chemical plant and the LNG gasification plant on the Kenai Peninsula. Coal from the immense reserves at Beluga would be gasified to feed into the Cook Inlet system, which is running low on gas to supply the two plants, initially built years ago to use cheap excess gas.

The gas is no longer cheap and during the peak winter period there is no longer much excess. A coal cogeneration project also could be built, which would produce electricity and free up the natural gas currently used in power production, Murkowski said. The byproduct CO2 could be reinjected into depleted wells. Eventually the process could be taken one step further to create synthetic petroleum products. "There are synergies here. If we put this all together, we might have a favorable economic opportunity," he said.

The governor said he had asked that Shell appoint a team of experts to join state representatives in evaluating the project. Currently the nitrogen plant is running at reduced capacity and the LNG facility contract expires in 2009. "If we are ever going to justify a lateral pipelne into Kenai, we need those two major facilities," Murkowski said, referring to a proposal to run a spur into Kenai and the Cook Inlet system off the proposed Alaska gas pipeline.

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